Harrington's Sort & Cull

The Dangerous Making of Average

No one likes average. At least, not before being saddled with below average.

Whenever that happens (a definitional necessity for a certain number of helpless players in a given sample), every underachiever in the room would give his right standard deviation to hug the center of the bell curve just a little tighter. But like it or not, building the statistical average always requires an awkward alliance between winners and losers, some happy campers and some sad sacks on the verge of desertion.

Of course, there are averages and then there are averages.

In order to generally maintain the population of data points (just for fun, let's call them lucky and unlucky cattle feeders), a significant majority needs to have a meaningful degree of affinity with the average. In short, the terrain of distribution needs to be closer to the foothills of the Ozarks than Mount Everest.

If business-minded beef producers in pursuit of average fed prices and profits (the only objectives outside of Vegas that truly make sense) begin to feel they are just taking turns successfully assaulting and plunging from the latter, who could blame them for employing career counselors?

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All of which brings me to consider the extreme volatility of the second-quarter fed cattle market just completed. To say it was quite a ride would be like describing "Sully's" landing on the Hudson as unplanned.

Preliminary numbers indicated that the 5-area steer over the last three months averaged right at $127.50, 5% below the first quarter (i.e., off $7) and 19% short of April-June 2015 (i.e., off more than $30).

While this quarterly average clearly reflects a defensive market, it hides week-to-week volatility that bordered on the unmanageable. Specifically, the average weekly price swing over the 14-week period totaled no less than $3.65, ranging from a $7.54 drop in the third week of April to a $5.97 surge in the second week of May.

Compared with recent market history, second-quarter price swings simply seemed to set a new standard of wildness. Just note the week-to-week average price changes in the spring quarter of the following years: 2012, $1.60; 2013, $1.22; 2014, $1.68; 2015, $1.95.

Expressed another way, total cash movement last quarter (i.e., combined gains and losses) amounted to a staggering $51.10, up from $27.30 in 2015 and the four-year average of $22.50.

Larger producers that market cattle every week obviously had a better shot at managing this crazy average than their smaller counterparts who could do little more than go to church on Sunday. But even the biggest hands at the table found themselves extremely frustrated by shifting price behavior that all too often seemed inexplicably random.

I suppose producers and traders should be grateful that it wasn't necessary to pry a wedge of black swans through the quarter (Brexit surfaced too late to count). But at least such an invasion of outside shock factors might have been blameworthy. In their absence, we're left with some very uncomfortable questions.

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John Harrington

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